Understanding the New “Inflation Tax”

Posted on January 22, 2013 by Dr. David Edward Marcinko MBA MEd CMP™

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More on the CPI

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Rick Kahler CFPWith all the talk recently, about tax rates and the fiscal cliff, hardly anyone has mentioned what is probably the most effective and least understood tax in the federal arsenal: inflation.

Wait a minute. Isn’t it confusing to call inflation a tax? It is. That confusion is exactly why inflation is the ultimate stealth tax.

The CPI Formula

One of the few deficit-reducing measures that had the support of both parties and President Obama is a change in the way the government measures inflation. Our lawmakers have agreed on another in a series of adjustments to the way they calculate the consumer price index (CPI). The proposed changes will understate the future CPI even more than the current formula already does.

This maneuver is a brilliant way for deficit-reducing lawmakers to both cut spending and increase taxes, without calling their action either a spending cut or a tax increase.

The “Chained” CPI

How is this possible? First, here’s a brief explanation of the proposed change, which is called the chained Consumer Price Index. According to an AP article published in the Rapid City Journal on December 5th, 2012, “the chained CPI assumes that as prices rise, consumers turn to lower-cost alternatives, reducing the amount of inflation they experience.”

The assumption is that, if the price of pork rises while chicken doesn’t, people will buy more chicken. Yet they’re still buying protein. Therefore, presto—no inflation has happened. This argument is like saying if the price of gasoline goes up and the cost of walking doesn’t, people will just walk more, so there’s no problem.

A Spending Cut

The chained CPI is a spending cut because many entitlement programs are indexed to the CPI. These include Social Security, government pensions, veterans benefits, and the interest on some of the national debt. The lower the increase in the CPI; the less benefits will rise.

The AP estimates that once the new CPI is fully phased in, a 65-year old on Social Security will receive $136 a year less. At age 75 the reduction will be $560 annually, and at 85 it will be $984 less.

In addition, as wages increase at the real inflation rate, entitlement programs won’t keep pace. Gradually, fewer people will be eligible for programs like food stamps, Medicaid, heating allowances, and Head Start.

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cpi

A Tax Increase

The chained CPI is a tax increase for much the same reason. Many income tax brackets and deductions are indexed to inflation. Smaller annual adjustments to the brackets because of the lower CPI will push more people into higher tax brackets.

Tweaking the CPI is nothing new. Politicians from both parties have done so for years to give the illusion of a lower CPI than that calculated by previous methods.

ShadowStats.com, run by John Williams, calculates the current unemployment and inflation rates using the formulas from the 1980s. According to that methodology, the unemployment rate (U-6) is 15% and the CPI is 9%. Yet the government has tweaked the CPI so much that today the official CPI is 2.5%. Under this newest proposal, inflation would be 2.2%.

The Results

You may think understating the current CPI by 0.3% isn’t any big deal, but it is. The decrease represents a 12% drop in the inflation rate, which understates the increase in our cost of living. If your employer reduced your wages by 12%, you’d probably see it as a big deal.

Assessment

Proponents figure the newest CPI adjustment will save $200 billion in spending increases and raise $65 billion in new taxes over ten years. It doesn’t matter whether you call it inflation, chained CPI, or plain old gimmickry. A tax increase by any other name is still a tax increase.

Macro-Economics and What the ‘Chained CPI’ Could Mean for Social Security?

Conclusion

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Understanding the Domestic Unemployment Numbers

Posted on October 24, 2012 by Dr. David Edward Marcinko MBA MEd CMP™

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How Can Unemployment Be Going Down?

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

In an economy that isn’t exactly robust, how can unemployment be going down? The recent drop in the unemployment rate from 8.1% to 7.8% caught almost everyone, including me, by surprise. The GDP grew by only 1.5% in the first quarter, and its growth was under 2% for the last 12 years. To get the economy moving again we will need growth of 3% a year.

It isn’t surprising that many pundits were questioning the timing within minutes after the latest unemployment numbers were announced. After all, unemployment is one of the major issues in the Presidential election. Former General Electric CEO Jack Welch and several Fox News commentators even suggested the administration was cooking the books.

The BLS

I don’t believe the Bureau of Labor Statistics is manipulating unemployment data. The process of computing the data is straightforward and transparent. Two surveys go into projecting the unemployment rate, one covering 400,000 businesses and the other questioning 60,000 households. The surveys ask about the number of full-time and part-time employees, whether the part-time employees really want full-time employment, and whether those without a job have looked for a job within the last month.

Cooked Books?

But that doesn’t mean the books aren’t cooked. They are.

“The way the government derives the unemployment numbers has changed significantly over the last 30 years,” writes John Mauldin, editor of the economic newsletter Thoughts from the Frontline, in the October 8, 2012, issue. “Whatever administration is involved, the new equations for determining unemployment result in a lower unemployment rate than they would have if the 1980’s methodology were still in place.”

The Changes

One of the more bizarre changes in the unemployment rate calculation is that people are not considered unemployed unless they have looked for a job in the last 30 days, even if they currently receive unemployment benefits. Mauldin says there are probably many people who haven’t looked for a job in the last 30 days and that most, if not all, of them would consider themselves unemployed. “If you’re not disabled and you’re receiving unemployment or welfare benefits I think you should be counted as unemployed,” he says. He estimates our actual unemployment rate is well over 12%, which doesn’t take into account the 50% of college graduates who are underemployed.

Don’t Blame Obama

Before you blame the Obama administration for the dumbing down of the unemployment rate, this is the same way the Bush administration calculated unemployment.

It’s the same story with the Consumer Price Index, which the government has continually tweaked to give the illusion of a lower CPI than if the 1980’s formula was used.

ShadowStats.com, run by John Williams, calculates the current unemployment and inflation rates using the formulas from the 1980’s. According to that methodology, Williams calculates the unemployment rate (U-6) is 15% and the CPI is 9%.

Regaining Jobs?

The economy has currently regained about half of the jobs lost in the Great Recession of 2008-2009. According to the Liscio Report, it will take another 40 months to reach the level of employment we had prior to the recession. That is if we don’t have another recession, which is doubtful. If all the tax increases slated for January 1 go into effect, the Congressional Budget Office says GDP will shrink 2.9%, which guarantees a recession.

Assessment

So, what was behind the fall in the unemployment rate this month? According to Mauldin, the entire drop came from an increase in part-time workers. He says, “That such significant numbers of people can only find part-time work is not a sign of a strong and growing economy.”

When we look a little deeper, maybe the latest unemployment numbers aren’t such a surprise after all.

Conclusion

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